In the course of practice, we have repeatedly seen employers make two fundamental mistakes when it comes to provision of commission pay: 1) not properly providing for vacation pay in the calculation of commission payments; and 2) failing to ensure commission payments comply with minimum wage requirements. While employer errors of this kind may be innocent or unintentional, significant financial liability can accrue as a result.
Vacation pay and deductions from commission earnings
In Ontario, provincially-regulated workers subject to the terms of the Employment Standards Act (ESA) are entitled to receive vacation pay at a minimum of four (4) percent of their gross wages. Federally-regulated employees subject to the Canada Labour Code (CLC) are owed four (4) percent of gross wages, with that amount increasing to six (6) percent after six consecutive years of service.
Some employers may elect to tell their employees that "your commissions will include any owed vacation pay" and try to leave it at this. Here is one such clause from an employment contract recently litigated in Ontario:
You will be paid commission at a rate set out in Schedule B (Commissions). This amount includes statutory amounts for vacation/holiday pay as well as statutory pay.
In the case from which this provision stems, Kinch v. Dufferin Communications Inc. c.o.b. as Evanov Radio Group, a former commission sales employee of a radio group claimed unpaid vacation pay for a six year period. This amounted to a sum of $35,396.02.
When challenged before the Court, the employer was not able to demonstrate that:
- It had ever made vacation pay calculations over the relevant time period;
- It had issued pay stubs and T4 documents listing any amounts related to vacation pay; or
- Any adjustments to commission entitlements were made over the course of the employee's tenure, despite having moved during that time from a minimum vacation pay of four to six percent.
As can be seen from the above, a lack of records and clear communication as to the application of vacation pay was fatal to the employer's defence. Without such information, an employer cannot establish what, if any, percentage of commission payments were ostensibly allocated to vacation pay.
The Court also provided this helpful guidance for employers as to the test it will impose regarding allegations of insufficient vacation pay:
"[A]n employer who seeks to satisfy its obligations to pay vacation pay by taking that pay out of commission sales must, at a minimum, demonstrate that the employee is aware of her vacation pay entitlements under the CLC and, that by agreeing to such an arrangement, she is receiving a benefit that is either equal to or greater than those entitlements."
Minimum wage and commission payments
Commission payments are, by their very definition, variable. They seek to incentivize hard work by the recipient through sharing in the profits (and hardships) of the business. Yet there are limits in terms of how much pain an employee must bear as a result of poor sales.
Most workers in Ontario are afforded the protection of the minimum wage. This protection applies just as equally for qualifying employees compensated on a commission basis.
If a commission based employee's wages for a pay period are less than what they would have earned had their recorded hours of work been remunerated at the relevant minimum wage, employers are obliged to top-up earnings to meet this minimum standard.
The Ministry of Labour provides a helpful example of how this process works:
"Luba works on commission and has a weekly pay period. One week, she was paid $150 in commission and worked 25 hours. The minimum wage applicable to Luba is $11.25 an hour. The minimum wage ($11.25) multiplied by the number of hours worked in the pay period (25) is $281.25. Luba is owed the difference between her commission pay ($150) and the required minimum wage ($281.25). Luba's employer owes her $131.25."
Employers must take care with their commission sales employees to regularly monitor hours of work and reconcile these with commission earnings per pay period. Furthermore, it is not permissible to offset pay from one period to another. For example, if a worker earned $4,000.00 commission in a month for an employer with a monthly pay period, but nothing in the next, the worker would still be owed minimum wage in the second month.
Commission pay provides a useful and flexible means of employee compensation. Just be sure to implement with care.
This article was first published on March 15, 2016 on First Reference Talks.